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As the new head of Microsoft’s game business, Phil Spencer gave his first command performance on the big stage at the Electronic Entertainment Expo (E3) video game trade show. Having learned a lesson from a year ago, Spencer said his focus will be on delivering great games, rather than touting celebrity endorsements for the Xbox One game console or its non-game entertainment features. He also said he was going to listen to feedback from gamers and take it into account.

Spencer and his team spent an hour convincing us that Microsoft has the line-up to succeed in the long war with Sony, rather than just the short-term street battle. Microsoft has nine exclusive games coming to the Xbox One in 2014, including Halo: The Master Chief Collection; Sunset Overdrive; Forza Horizon 2;
Ori and the Blind Forest; Dance Central Spotlight; Disney’s Fantasia: Music Evolved; Project Spark; Killer Instinct: Season 2; and Fable Legends (multiplayer beta).
Phil Spencer of Microsoft

Phil Spencer of Microsoft

Those games look good, but so do arch rival Sony’s. And Sony has a lead in next-generation console sales, as it has sold more than 7 million units of the PlayStation 4 through the first quarter while Microsoft has shipped 5 million to retailers. Microsoft is investing heavily in its platform and game studios to make a difference, but Sony still has advantages, as it is selling a $400 box against Microsoft’s full-Kinect version of the Xbox One at $500 and a Kinect-less version at $400.


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We talked about these matters in a wide-ranging interview on Tuesday. Here’s an edited transcript of our conversation.

GamesBeat: What do you think of the battle of the press conferences?

Phil Spencer: I think everybody had a good one. I watched Sony last night over in our hotel. We got a team together. A lot of years I actually go to the Sony one. We watched what Nintendo did. I thought Nintendo’s was funny. The tone they took was good. It’s a good year to be a gamer. All the console manufacturers showed up. Sony and Nintendo I thought had good conferences. What did you think?

GamesBeat: There are good games. I’m always sad about the ones that slip into 2015 or beyond. It’s the way of the business, I guess.

Spencer: We opened ours with an hour of all content you’re going to play on Xbox One in 2014. I wanted to make sure that we were deliberate in talking to the consumer, the gamer—If you own an Xbox One or you’re looking to buy an Xbox One, this is what you’ll get to play this year. Now that everything’s out there, I’d say that Destiny’s coming. GTA’s coming. You have Sunset Overdrive, Halo, Forza, Battlefield, Call of Duty. It’s a good lineup of games you’ll be able to play on Xbox One this fall.

GamesBeat: The investment in new IP–

Spencer: Like Sunset Overdrive.

GamesBeat: Yeah. Is that one you would consider to be in that category?

Spencer: It is from an investment standpoint, absolutely. Insomniac is a triple-A developer. I think about Sunset Overdrive, Quantum Break, bringing back Crackdown. It’s not like Crackdown is something we annualized. So either what I’ll call dormant IP or brand-new IP—As a first party, it’s an important part of what we do. But it’s not without risk. It’s probably the biggest risk, biggest return in the industry, if you get it right. But that’s true in any entertainment business.

GamesBeat: Now that you’ve been steering things for a while, do you foresee some changes in the the balance of different things? New IP versus servicing franchises, bringing in third parties, and so on?

Spencer: I just want the best games that are out there to be playable on our box. That’s going to be a mix of things that the third parties are building, and then we either go off and make sure they’re coming to Xbox, or we do some marketing deals or DLC deals to make sure they’re special on our box.

Looking at the content that we as a first party will bring, if you like a smaller game, a smaller indie-style project, very pretty, a different style of gameplay over a lot of the big mega-franchises, we’ll go support those. Things like Phantom Dust, bringing a game that people haven’t seen in more than 10 years. But also things like Halo, Sunset Overdrive, Forza. Any change, really, is going to be more about looking at the whole content portfolio and making sure our game portfolio is strong every year.

GamesBeat: Sony said they had 25 free-to-play games coming. What are your feelings about free-to-play?

Spencer: We have free-to-play games on Xbox 360 right now. Some of them are doing well. It’s like any game genre. It’s a hit-driven business. Things will come over. We’ve been invested in Happy Wars a long time. We have Warface and World of Tanks on the platform. The only thing about free-to-play as it comes to a next-gen console is just about when the installed base gets large enough that the games make money.

Phil Spencer E3 2014

GamesBeat: Because maybe two percent of players actually buy something.

Spencer: Right. That’s the model. It’s a successful model, especially on scale platforms like PC and mobile. It’s working for us on 360. We’re seeing games that are successful. We’ve been in discussions with developers on Xbox One about when games are going to come. We’ve talked about Happy Wars and stuff. But you want the installed base of people playing to be large enough that there’s a viable business for those guys. I want developers and publishers to be successful on the box.

GamesBeat: Do you have some opportunities for some of the bigger games like Project Spark or Dance Central Spotlight as possible free-to-play games?

Spencer: I look at free-to-play as almost a creative tool. I know that sounds crass to some people, because it’s obviously a way of monetizing a game. But the engagement mechanic in free-to-play games is just different than a retail-driven game. Retail-driven games assume you buy the game up front and it delivers all this content. Free-to-play gives you this small compulsion loop where adding a consumption, usually on top of that compulsion loop, will lead to fun.

You have to think about it from the beginning of the creation of a game, whether you’re trying to create a free-to-play compulsion model or a retail model. At launch, I got a lot of questions about how Killer Instinct is a free-to-play game. No, technically, from a design standpoint, Killer Instinct wasn’t free-to-play. It was more of a trial where you can buy the additional content. There was nothing consumptive about it. You own the characters once you buy them. You’d eventually buy them all. Free-to-play games never have this notion that you’ve eventually bought all the content, because that doesn’t make sense in a free-to-play game. They’ll always have something you can keep buying.

Games like Spark and some others, they’d have to start with what they’re going to be. What is the business model behind the game from the beginning? Spark isn’t a free-to-play game in the traditional sense.

GamesBeat: You have the opportunity for something interesting as far as the model goes.

Spencer: We could. For me, Spark is just a really interesting tool to get people creating. We’ve seen more than a million people create things on the platform, which I love. Now we’re starting to bring content from some of our older franchises into the Spark world. We announced Conker, so that people who want to go re-create their Conker memories in Spark can go do that. I know certain people want us to go do a brand-new Conker game. It doesn’t preclude us from doing that. It doesn’t mean we are doing that. This is just an opportunity, with something like Spark, to give tools to the community so they can go build and play.

GamesBeat: You said you were going to listen to gamers. What if they all say they want a price cut?

Spencer: (Laughs). The one thing about running Xbox—I think about this business as a decade-plus business. I know you’re asking in a teasing way, but I don’t think I help anybody if I put the business in a position where it isn’t a rational business over a long period of time. If you buy a console and the console isn’t a success, that’s usually not great for you.

I’m committed to making Xbox One a success for gamers, but it’s also gotta be a success for Microsoft. Both those things have to be true. That’s good for gamers. Giving consumers choice around a $399 console, I look at that as a way of making Xbox more successful. If Xbox is more successful, that’s better for gamers, because more publishers will support it. In a way, it’s better for Kinect as well, because Kinect plugs into the console. The larger the installed base for the console, the more opportunity you have for people to go off and do interesting things with Kinect.

It’s all about growing that installed base, but growing it over the long term. You ensure that the viability of the business is there.

Dance Central Spotlight

Above: Dance Central Spotlight

Image Credit: Harmonix

GamesBeat: Now that you’ve changed the box configuration options there, are developers reacting differently when they approach Kinect development?

Spencer: No, we haven’t seen a difference. Obviously, with the installed base of Xbox One, people have Kinect. This discussion about how we need to make Xbox One as successful as it can be, that’s good for all developers. It starts there. With all the publishers out there, they’ve got businesses. Not all of them have Kinect businesses, but they’re usually looking at their games. The games fundamentally run on the console. They need to have the console run rate and installed base be as high as possible.

The creative opportunities around voice, around gesture—You can go out on the floor and look at hastag Idarb. It’s doing some scanning things with Kinect. You can look at Froo. We had Alex on our stage with Dance Central and Fantasia. The genres that are working with Kinect, the new inventions that people are trying to build around Kinect, will continue. People know that if you catch lightning in a bottle with an idea, people will get the right configuration to play. Think about something like Guitar Hero. People went out and bought a guitar to play those games.

Kinect is something you can see horizontally across a lot of games. We had more than a billion voice commands issued since the launch of Xbox One with Kinect. People are using the Kinect when it’s plugged in. Developers see that.

GamesBeat: I saw Bonnie Ross (general manager of 343 Industries) and asked her about this, but the Halo: The Master Chief Collection, it seems like a very innovative merchandising or packaging idea. It’s older content, but you’re making it enticing again for people. They’re getting four games, 100 multiplayer missions, the Halo 5 multiplayer beta, and the Halo: Nightfall digital video. Any one of these different things might be a reason to buy. The only question I have is whether you have to make a trade-off as far as taking a development team off an original game.

Spencer: Not with that project. If we’re starting something with one of our internal teams, or a triple-A developer that wants to do something, there’s always an opportunity cost. This is something we came up with.

You’re right. Part of it’s just an interesting decision, to ship all four games completely unlocked, so you can drop in to any level you want. A lot of people who will purchase this may not have played all of them, but they’ve probably played at least some of them. So it’s not about wanting to go through one through four in line. You can do that, but it could also be like listening to a favorite album, where you want to hear the songs you like. It’s a game where you want to drop in and play the multiplayer maps you love, or a certain single-player mission. Not only in the pricing, but also just in the way that the content and the story are presented, it’s going to be interested.

As far as the trade-off, we thought about it at first around that idea. What does it mean to deliver all this content early in the life of a new console at 1080p/60? Then we went out and found developers that we thought would be great to do that. But it wasn’t something that was part of our Halo 5 story, as far as development. Development of Halo 5 is Bonnie’s team. Bonnie manages what she does with things like the Master Chief Collection separately from that.

GamesBeat: I remember the problem they had with 360 to consider, which was maybe that the Halo 2 players wouldn’t come over to the new console. The Halo 3 delivery date was later in the console’s life. This seems like a good way to bring a lot of people to the new console, the Halo players.

Spencer: You brought up the price. When we thought about this, I didn’t see it as a way of—I wanted to make sure it was at a price that was enticing to people who maybe had some subset of the content, or who had always been intrigued about Halo and said, “I have this Xbox One. I plan on having it for the next 10 years. This will be one console I’ll be able to play Halo CE, 2, 3, 4, and Halo 5 on.” There could be future Halos, too.

I just think it’s interesting, early in the life cycle of the console, to set that beachhead. This is going to be a great place to play Halo, all out. A lot of that went in to thinking about delivering that product and when it’s coming.

GamesBeat: It’s a way to annualize the content, in a way, without causing some of the problems that come with that. People can get tired of their favorite franchise if it comes every year.

Spencer: Annualizing is an interesting thing. I’ve been pushed on this before about Halo, whether we’re going to annualize it. This was more around—The talk track started around Halo 2 Anniversary, and we quickly said, “Early in the life cycle, let’s figure out how we get all this content on the box.” The fan reaction and the press reaction’s been very positive, which I’m happy to see.

Halo being story-driven in what it is, I’m not sure it’s going to follow the same annual pattern you see in some other franchises out there. I don’t know if it’s right for that game. From a publisher standpoint, we also have Gears of War. If I have a couple of games – one third-person, one first-person, but in similar genres – I’m not compelled to pit them against one another, since I own them both. Maybe there’s a more sequenced way to think about those franchises.

GamesBeat: 343 also has to think about the story being consistent across the television shows and the games.

Spencer: Bonnie’s done a nice job. One of the reasons for having Frank O’Connor coming over from Bungie, he was one of the early Halo creators in terms of the IP. Kiki Wolfkill and that team are thinking about the franchise in all its different facets, whether it’s the books or getting into video. The game is first and foremost, but making sure there’s continuity all round is critical.

GamesBeat: Does the TV show become a big business opportunity as well? How do you think about video in that way?

Spencer: We think about it in a few ways. I love playing video games. Not everyone consumes stories through video games. To some people, that’s an abnormality. They don’t want to hold a controller. They just want to watch TV. Halo’s story is an interesting story. It’s something that we want millions of people to be able to see and experience. Video gives us an outlet for people who maybe aren’t going to play a first-person shooter game. They can say, “Okay, I get it.” Because the story has merit on its own.

That obviously makes Halo the name, the brand, more valuable, more popular, more enticing, because more people know about it. If certain people then choose to play the game, that’s great, but we don’t look at it necessarily as an on-ramp to bring all those people to the game.

It’s all part of the Halo franchise management, run out of 343. I want the IP management, the franchise management, to be handled by the studios and not somehow splintered that off. From a story standpoint, it’s cohesive, and also just from a standpoint of the business and where we’re investing, to make sure it all holds together. That has impact across everything we’re doing with Halo – books, toys, everything.

GamesBeat: It seems like their production is very difficult to align.

Spencer: It is. The timelines are different, both the start and the end times.

GamesBeat: The animators on the film don’t want to have to suddenly change something based on a game.

Spencer: That’s right. When you’re thinking, “What is the story that the TV’s going to tell? What’s the story the game’s going to tell?” It’s one of the interesting things with Quantum Break and Remedy. They’re trying to do both at the same time. They’ve talked a bit about the TV telling the story of the corporation and the game telling the story of the protagonist. You’ve seen the story from both sides in a different form of media. It’s a great experiment, if you can call it that. It’s a great step forward. Remedy are great storytellers. It’s an interesting thing for them to go try and do.

In a lot of ways we’re still early in the interactive storytelling art form. How that mixes with something that’s purely linear–It’s going to be a fun few years as things emerge a little more.

GamesBeat: It’s an interesting blending of platforms. What do you think of other ways to blend things, like the toy-game combination, or mobile-console, like they’ve done with the companion app in Watch Dogs?

Spencer: This is an area where we spend a lot of time. We’ve had some successes and we’ve had some things that haven’t worked. That’s the nature of the entertainment business. You want something that seems connected, but not distracting. You want something that’s additive, but in some ways not required. As soon as it becomes required, you alienate some people who say, “No, I don’t want to look at my phone when I’m watching TV.”

It’s a line. With a Kinect game or anything else–You’ll get some people like Harmonix, with Dance Central, where they say, “Kinect is required, obviously. I’m not going to have you dance with a controller.” Then they go all in and they sell millions of units of that. You’ll see things around Smartglass and other phone-console interactions. Something will break through. I don’t think we’ve seen the Dance Central of that scenario yet. There have been some good examples, but nothing’s had that level of success, at least that comes to mind.

Those kinds of hybrid storytelling experiences—Even something like watching Game of Thrones on HBO Go, if you’ve done that, where they have the snap mode thing on the side that gives you the family trees when someone new comes into the scene. Some things are added information. Some of them are gameplay inputs. We have an exciting road ahead as people think about it. It’s going to be people from both sides. Some will come from the game side, like we do. Some will come at it from purely linear storytelling. Where we meet in the middle will be interesting to see.

xbox smartglass demoGamesBeat: Do you think mobile has something to teach triple-A?

Spencer: The thing about the mobile space is that the half-life of mobile games, historically – and this might be changing a little bit now – is pretty short. When we look at the indie space, it’s going to be interesting to see. It seems that right now it’s more of a volume thing. It feels more like mobile in that way, which isn’t bad. I love being able to say I’m going to sell a game for a number of dollars that isn’t 60. Here’s how much game I’m going to build. Here’s how deep I’m going to go.

The business model stuff we talked about before, with free-to-play. I do think that’s an area where console will evolve as the installed bases grow. There’s a lot of learning from mobile in that space, mobile and PC. I see a lot of excitement in the PC space right now. It’s fun to watch. The biggest franchises in the world now are on PC.

GamesBeat: Do you feel like you have something either secretly in the works or something already in the lineup that’s your big IP? Sony has The Last of Us. They’re going to continue with that. Ubisoft has Watch Dogs now. Do you feel like you have something as ambitious as some of these things could be?

Spencer: I’ve got a lot of things like that. Those big triple-A franchises that we start, we always start with the ambition that this is going to be the best-selling, most successful—Everybody shoots that high. When you go to a game studio and they’re working so hard, so passionately for what they’re doing, it’s the belief that what they’re creating is going to become the next big thing.

Sometimes it starts with something that has a big ambition and hits it. Sometimes it starts from Notch building a little Java game called Minecraft and it takes over the world. It’s unclear where the thing starts from, when you’re thinking about where it ends. But everything we start, we have an ambition for it to be successful.

I like our lineup in 2014. It’s a real selling point for Xbox One right now. I love our lineup in 2015. I’m excited about the things that are out beyond that. It’s going to be a good time to be an Xbox gamer.

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